Family and friends are often the first source of capital for a new business venture. Yet, taking money from close friends and relatives is fraught with complexities. As Joe Moore said, "before borrowing money from a friend, decide which one is more important".
Yet, handled properly, there is nothing more satisfying than involving those we love in our success. Accessing funding from the two Fs should be approached with respect, transparency and accountability, even more so than from arm's length investors.
Amongst companies we have seen at Stride recently I have been surprised by the number of those funded by their loved ones. Perhaps not so surprising that most of them got this first investment dangerously wrong.
Here are some of my tips to help you raise money from family and friends (the two Fs) with the objective of maintaining good relationships.
Be honest and clear
You have to clearly explain why you need the money and avoid fudging or relying on their 'love' for you. Treat them like any other investor and outline your plan for how you will use the money, how far it will take you and when they can expect a return. What rights will be assigned to the investment or loan, how much equity it might represent, if any, in the company and what happens when you have to raise additional funding.
If it is a loan, be very specific about the terms and conditions, interest, repayment schedule and timetable. If it is an investment, it is likely to be illiquid for some time, and they may not be able to get their money back for some years. This should be discussed upfront.
Sometimes, you might get pushback on discussing the terms upfront; your relatives may not want to appear as though they are in it for the money. So, you will have to explain that clarifying everything upfront is for the protection of both parties. Even more importantly, it is for the protection of the relationship.
Respect their decision
Many people believe that the best way to ruin a friendship is to bring money into it. You should not try to change their mind. People's finances are private, and they may not be in a position to support your venture even though they are not comfortable sharing this.
Even if your loved ones have the money, people have different risk tolerance, and a start-up venture may not be what they feel comfortable with. It is their money, their decision, and they do not owe you anything, not even an explanation. Respect their position, don’t take it personally and don't let financial matters strain your relationship.
Have a written agreement
Especially with family and friends, it is best to have a simple written agreement to prevent misunderstandings later. Memories can fail, and we tend to remember things differently.
Your agreement does not have to be prepared by a lawyer but should record the important terms. If the money is a gift, this should be recorded as much as if it is a loan or investment.
Other things you should include are the amount, rights associated with the investment, and interest (if any) if it is a loan. Any repayment and the frequency should also be added. Finally, don't forget to have it signed by both parties.
A word about legal advice. It can be daunting to know who to speak to, as not all lawyers are equal. Preferably, you want someone experienced in start-ups. You can connect with professionals specialising in start-ups to access suitable advice through start-up events at Fishburners or Tank Stream Labs, where early-stage founder communities thrive.
Whether you got the money out of love or friendship, your investors will be super impressed if you show them how you will spend it, how far it will take you in the venture and what you will achieve with it. Share as much information as you can without overselling the future and make your investor/lender feel like they are part of the story.
Maintain regular communication
This is, of course, true for all of your investors, not just family and friends, but it is especially important here.
Keep communication open and be available for an update anytime they contact you. More than anyone, they will be ready to celebrate your successes, and will no doubt be support to lean on when things don't go well.
Regular updates, outside of family interactions, will also make your early investors your advocates. They can share news about your products, your campaigns, media, or social media wins. Whether they will disclose their investment or not, they will champion your business amongst their social networks. Their endorsement can be a powerful tool in your social media strategy.
When a friend or relative invests in your business or provides you with a loan to get started, they show respect and trust. They do it to assist you, and it is appropriate that you thank them. Again, no need to go overboard, but there is nothing wrong with showing gratitude and acknowledging how important their support might be.
Be fastidious when complying with the terms of your agreement
This is perhaps the most important part of the investment or lending relationship with friends and family. Make sure that you comply with the terms of your agreement and don't miss scheduled payments if you have borrowed.
Keep the lines of communication open in case there are any issues with the business that prevent you from complying with the terms. If so, provide alternatives and be always open to amending the terms to ensure that your investors' interests are looked after.
Involve your early backers in celebrating your success
We all strive to succeed in a game that takes many years to bring to fruition. Overnight success is rare, and it is easy to forget who cut the first cheque after 7-10 years in the business building wilderness.
When family and friends are the early backers, it's not just about the money. They invest in our dreams, and it is an expression of their respect and trust. When we celebrate our business success with them, we'll have the ultimate success in life; stronger personal relationships.